David Monroe's Real Estate Blog

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David Monroe

  • Would You Give A Loan To This Buyer?

    Consider this scenario:  You paid off your house a few years ago now you’re selling it for $300,000.  You figure that you would make a better return on your money by offering owner financing instead of cashing out and investing the money somewhere else.  This is a big part of your retirement, so it’s a very important investment decision.

    A buyer is willing to pay your asking price of $300,000.  Here’s a snapshot of the buyer’s situation:

    • The buyer can only give you $11,000 down.
    • The down payment is part of a $17,000 gift received from the buyer’s parents, the remainder of which will be used to pay closing costs. The buyer has no savings outside of that. 
    • The buyer has marginal credit with a credit score of 620 and had a couple 30-day late payments on credit cards just over a year ago when they had some unexpected car repairs.
    • Based on conventional lending guidelines, the buyer has just enough monthly income to make the mortgage payments. 
    • The buyer has been pre-approved for an FHA loan (assuming a seller contribution toward the buyer’s closing costs), but they figure they can save on some of the closing costs and FHA insurance costs by going with the seller financing.
    • The buyer loves the house, wants to live there forever, and assures you that their mortgage payment will always be the first check written every month. 
    Based on that information alone, would you do the deal?  FHA would.  I would not.

    Let’s look at the statistics.  Edward Pinto, a former Fannie Mae chief credit officer, recently testified before a House panel that that an estimated 20 percent of FHA’s entire portfolio will end up in foreclosure, which was also supported by estimates that FHA provided to Congress.  That’s one in every five loans. 

    If you have to foreclose, you could be looking at $15-$20,000 in legal fees and lost interest, not to mention that you may have to make repairs before putting it back on the market, and if the market has declined, you would lose more money in the form of a lower selling price.

    Why do we expect our government to take financial risks that we’re not willing to take ourselves?  Is it because it’s not money?  Well, it is our money.  And if we don’t support responsible lending, we’ll end up bailing out the FHA program as well.  Adding to our national debt to bail out FHA will lead to higher taxes, which will lead to less disposable household income, which will lead to less available money for home purchases, which will lead to declining housing prices.

    Instead of blaming the government for damaging the housing market because of the more stringent FHA rules that were announced, perhaps we should be thankful that a low down payment program such as FHA exists at all.
  • How To Fix The Short Sale System

    We’ve all seen the horror stories relating to short sales, and some of us have experienced them.  As a short sale specialist, I often times find myself questioning the logic of banks.

    The government has even stepped in on occasion, passing legislation that is supposed to improve how banks handle the short sale process.  However, each time, banks find loopholes and nothing really changes.  The legislation isn’t specific enough, because the people writing the legislation don’t understand the short sale process.

    Short Sale System

    Here Is My Proposal

    Establish required timelines for each specific step in the short sale process:

    1. Acknowledge receipt of short sale package and assign to a negotiator (3 business days)
    2. Negotiator introduction call to seller, agent, or third-party negotiator (3 business days)
    3. General property evaluation and appraisal or interior BPO (10 business days)
    4. Mortgage insurer and/or investor approval (10 business days)
    5. Decision letter issued (2 business days)

    Total time required for short sale approval:  28 business days (5 ½ weeks).

    The bank should allow Steps 1-3 to occur prior to receiving an offer from a buyer, as long as the property is listed for sale.  This way, only 12 business days are required for written approval once an offer is received from a buyer.

    Loan servicers are currently required to forward all buyer offers to the investor, but that often times does not happen.  A bank negotiator may prevent an offer from reaching the investor because they don’t want to go through the hassle, or they have a personality conflict with the seller, agent, or third-party negotiator.  I propose establishing a requirement that all bona-fide offers must be forwarded from the loan servicer to the investor within 3 days after receipt, or be fined at least $5,000 for each failure to comply.  A bona-fide offer is a valid Purchase and Sale Agreement with a pre-approval letter from the buyer’s lender or proof of funds for a cash offer.

    Loan servicers would receive $1000 for each short sale approved within the required 28 day timeline, in addition to any other fees established in the contract between the loan servicer and the investor.  The only problem here is that the $1000 really should be paid by the investor that owns the loan (not the government), but it would be difficult to force all investors to revise their contracts with their loan servicers even though it would be in their best interests to do so.

    Lenders would be given 60 days to start complying with the new short sale regulations, which would give them sufficient time to hire and train additional staff if necessary.  The additional $1000 per approved short sale would more than pay for the additional labor and office expenses.

    The End Result
    • Short sales would no longer have the bad stigma currently associated with them. 
    • Short sales would sell for higher prices, because buyers wouldn’t require significant discounts to compensate for an indefinite short sale approval period.
    • Real estate values would stabilize, because short sales and foreclosures wouldn’t have as much of a negative impact on prices.
    • Banks would reduce their losses, because short sales would sell for closer to market value.  With a defined short sale approval timeline on all short sales, the buyer pool for short sales would expand since many buyers who are avoiding short sales now would be likely to consider short sales with a guaranteed short approval period.
    In an effort to keep this blog post from running on, I left out many other details that would need to be included.  However, this should serve as a general starting point.
  • Bank's Actions Defy Logic

    Short Sales and BanksI specialize in short sales, and I’ve observed many actions by banks that seem to defy logic.  This particular experience is no exception.

    A while back, I had a short sale listing that was being negotiated with the bank at $300,000.  The buyer ended up backing out right before we received the short sale approval, because their financial situation changed.  We received the short sale approval letter, and the approval was conditioned upon the seller signing a promissory note for $20,000 or coming up with $10,000 cash at closing.

    We managed to quickly find another buyer who was willing to pay $10,000 more, but the bank refused to even consider the offer and asked to have the offer rewritten at $300,000.  They also said that regardless of the price offered, the seller would still be required to sign a promissory note unless the bank was receiving a full payoff.  Since full payoff would have been $450,000, that wasn’t going to happen.

    We gave the bank what they asked for -- $300,000 plus an additional $10,000 cash at closing, but the bank said they wouldn’t accept the additional $10,000 from the buyer—It had to come from the seller.  So what was the motive here?  To punish the seller?

    In the end, the offer was reduced to $300,000, the seller signed the promissory note (at 0% interest, payable over 10 years), and the deal closed.  I typically don’t like the idea of sellers signing promissory notes in these situations, but this seller’s situation was a bit unique and they felt it was in their best interest to do so.  They’ll most likely file for Chapter 7 Bankruptcy, which will wipe out the note.  The money was on the table and the bank refused it.  Now they’ll end up with nothing.
  • Short Sales And Lenders - Do You Know Who Your Lender Really Is?

    Short Sale LendersIf you were asked who your lender is—who actually owns your mortgage, what would your answer be?  Your mortgage statement may come from Wells Fargo, Aurora Loan Services, Select Portfolio Servicing, or some other lender, so they must own the loan, right?  It’s easy to assume that the company listed on your mortgage statement is the owner of your loan, but it’s usually not.

    The Loan Servicer / Investor Relationship

    • The company listed on your mortgage statement is the loan servicer.  The loan servicer doesn’t own the loan.  They are paid to collect, monitor, and report the loan payments, handle property tax and insurance payments, collect late fees, and foreclose on defaulted loans.
    • The entity that actually owns the loan is the investor.  The investor pays the loan servicer a fee to service the loan for them.

    Why Is This Important In Short Sale Situations?

    On a short sale, the investor takes a loss, not the loan servicer.  However, a short sale must be “negotiated” with the loan servicer, and the person or entity handling the short sale for the seller is typically not allowed to communicate directly with the investor.  Also, loan servicers are typically paid more to foreclose than to facilitate a short sale.  So, if this is the case, you’re probably wondering why a loan servicer would ever consider a short sale over foreclosure.

    The contract between a loan servicer and the investor requires the loan servicer to act in the best interest of the investor.  Since a short sale will usually net the investor more money (a smaller loss) than foreclosing and selling the property as a bank-owned property, the loan servicer will usually entertain a short sale as part of their contractual requirement with the investor.  However, because loan servicers typically get paid more to foreclose, they will often make the short sale process difficult, sometimes even trying to find small technicalities to kill the short sale deal.

    First and Second Mortgages With the Same Bank

    If you have a first and second mortgage with the same bank, they are probably owned by different investors.  This generally means that each loan is negotiated separately (with different short sale negotiators at the bank), and there may be different short sale requirements and timelines for each loan.   Even the information contained in the short sale package that is sent to the bank could be different on a first and second mortgage serviced by the same bank.

    If a short sale is necessary to sell your home, it’s important to make sure you’re working with someone who has short sale experience.  Someone who has experience dealing with difficult lenders will typically have more success and be able to prevent unnecessary delays better than someone who doesn’t specialize in short sales.
  • Can Investors Help Stop Foreclosure in Seattle?

    Stop ForeclosureCan investors help stop foreclosure in Seattle?  There are many real estate agents and investors offering to help stop foreclosure in Washington State.  Have you been approached by an investor claiming that they can help you stop foreclosure?

    The general concept is that the investor will help you stop foreclosure by purchasing your house.  This usually involves you owing more than your house is worth, which is the situation I’ll be addressing here.  The investor will make an offer to purchase your house, then negotiate with your lender(s) to get them to approve a discounted payoff on your mortgage(s).  This is known as a “short sale”.  When the bank approves, you get to sell the house, get out from under the debt, stop foreclosure, and save your credit.  Sounds pretty simple, right?  Not necessarily.

    First, I’ll clarify that investors are an important part of our real estate market.  I’m an investor myself, as well as a real estate agent.  Most investors I know are honest people trying to make a reasonable living.  However, it’s important to realize when an investor is your best option and when it is not.

    When selling to an investor to stop foreclosure may be worth considering:

    • The foreclosure auction is just around the corner:  If the foreclosure auction is less than two or three weeks away and you don’t already have a retail buyer in place, an investor may provide the best option (and possibly the only option) to stop foreclosure by getting the auction postponed while the bank evaluates their short sale offer. 
    • Your house is a fixer:  If your house needs a significant amount of repairs, a retail buyer may not be able to secure conventional financing, and a cash buyer may be required.  Investors need to make a profit, and purchasing a fixer at a discount and fixing it up can be a good way for an experienced investor to make a profit.  When a house needs a lot of repairs, the bank will often times accept a larger discount in a short sale situation.

    When selling to an investor to stop foreclosure may not be a good option:Stop Foreclosure

    • Your house is in good condition:  If your house is in reasonably good condition or only needs some minor cosmetic upgrades, the bank may not be able to justify accepting a large discount that an investor would typically require.  The bank will attempt to mitigate their losses, so they may feel that the house could be sold to a retail buyer, thus reducing their loss on the loan.
    • You haven’t received a foreclosure notice or the foreclosure auction is more than 60 days away:  If there is enough time to find a retail buyer, the bank may not be willing to accept a heavily discounted offer from an investor.  The bank may believe that less of a discount would be required if the property is listed for sale and sold to a retail buyer.
    • Your loan is an FHA or VA loan:  HUD is now using a minimum threshold net receipt to lender percentage of the market value as a basis for short sale approval on FHA and VA loans.  For example, they may accept a different minimum percentage of market value depending on whether your home has been listed for sale less than 30 days, 30-60 days, or over 60 days.  If the short sale proposal does not achieve the minimum threshold, it will not be approved.  If your home hasn’t not been listed for sale and an investor offers to purchase it, HUD may calculate the minimum amount that can be accepted based on a time-on-market of less than 30 days, causing the bank to require a higher net payoff.

    Also, many investors offering to help stop foreclosure are wholesalers.  They don’t actually purchase the property themselves.  They “flip” the contract to another investor for a fee (usually several thousand dollars).  This means that they need to negotiate a discounted payoff with your bank that’s low enough for them to make their profit as well as the investor they’re flipping the property to.  The success rate of short sales in this situation is fairly low, except when the house is in very bad condition.

    If an investor claims to be a cash buyer, ask them for proof of funds.  If they’re negotiating a short sale on your home, they will typically need to provide proof of funds to the bank to get the short sale approved.  If they really are cash buyers, they shouldn’t have a problem providing proof that they can actually purchase your home.  If they don’t want to show you their bank account balance, sometimes seeing proof of other recent cash property purchases they’ve made can be sufficient.

    While the information here may apply in most situations where an investor is offering to help stop foreclosure, it’s difficult to condense all possible scenarios into a single blog post and address every exception.  I encourage you to seek legal counsel from an attorney if you have any legal questions.  Also, I would be happy to share my experience if you contact me.
  • Do You Qualify For A Short Sale

    Man Chained To HouseDo you qualify for a short sale? You may have determined that you wouldn’t be able to sell your house for a high enough price to pay off the existing mortgage(s), and you’re now considering a short sale. You may be in foreclosure or just one or two payments behind, or maybe you’re current on your mortgage but unable to continue making the payments. You know you will not be able to stay in the home and you need to get out from under the debt.

    First, make sure you know all of your options for avoiding foreclosure. I recommend downloading the special report, 8 Ways to Avoid or Stop Foreclosure, if you haven’t reviewed all of your options.

    Doing a short sale will take some work and cooperation on your part, even if you use a professional to assist you.  However, the benefits of a successful short sale compared to foreclosure are significant enough that it should be well worth the effort.

    Here are some questions to ask yourself (and be honest):
    1. Do you have a legitimate hardship that prevents you (or will soon prevent you) from being able to pay your mortgage? Valid hardships include out-of-area job relocation, job loss, pay cut or other income reduction, divorce, significant home repairs needed that you can’t afford, and sudden increase in monthly expenses. There are other acceptable hardships as well, but you will need to be able to demonstrate to the bank that you cannot afford the house.
    2. Is your hardship short-term or long-term? If your hardship is short-term (maybe you lost your job, but you were able to regain similar employment a few months later), the bank may require that you attempt a loan modification or other workout plan first.
    3. Can you produce two months of bank statements, two years of tax returns, two months of pay stubs, a personal financial statement (a list of what you own, what you owe, your income and expenses), and write a hardship letter when you put your house on the market? This could take a couple hours or more depending on how organized you are.
    4. Are you willing to review and accept a reasonable offer on your property within 24-48 hours of receiving it?
    5. If you’re still occupying the house, are you willing to allow the property to be shown at all reasonable times?
    6. Are you willing to do some basic things to help your house sell, like clean the house, de-clutter, and clean up the yard? If a buyer expects a significant discount just because the house is a mess, the bank may think they can better mitigate their losses by foreclosing, cleaning up the property, and selling it at a higher price as a bank-owned property.
    7. Have you filed bankruptcy? If so, you’ll need to ask your bankruptcy attorney if it would be helpful sell the house in a short sale.
    If your hardship is caused by you moving out of the area, the bank usually will not consider it a hardship until after you have moved. If you’re being relocated in two months, the bank may not look at your situation as being a hardship now.
  • Deed In Lieu Of Foreclosure - Is It A Viable Alternative?

    Is a deed in lieu of foreclosure a viable alternative to foreclosure?  I don't usually spend a lot of time discussing the deed in lieu of foreclosure option, because it isn't used very often for homeowners in Washington State, but several people have asked me about it recently, so I thought it would be something worth explaining.

    With a deed in lieu of foreclosure, you give your house to the bank instead of going through the complete foreclosure process. This may seem like an easy way out, but it often isn't as easy as it sounds.

    First, let's look at the primary advantage for the homeowner. If the bank agrees to accept the deed in lieu of foreclosure and agrees in writing not to pursue a deficiency judgment or put a foreclosure on your credit report, this could be a way to get out of the house and out from under the mortgage without the bank foreclosing.

    However, there are a few things that you would need to consider:

    1. The bank will usually require that your house is listed for sale by a real estate agent for at least 60-90 days. They want to see that you’ve made an effort to sell it first. If there isn’t that much time before the foreclosure auction, this option may not be available to you.
    2. If you don't have enough equity, the bank may pursue you for more money.
    3. The bank may still record a foreclosure on your credit report.
    4. The bank will generally not approve a deed in lieu of foreclosure if there are any other liens against the property, including a second mortgage.
    5. The bank will usually require that the property is owner-occupied, not abandoned or an investment property. However, exceptions may include vacating the property due to job loss, job transfer, divorce, or death.
    6. You must be at least 31 days delinquent on your mortgage.
    7. You will usually need to prove a hardship (income reduction or increase in living expense).
    8. You would have to move immediately.
    9. There may be income tax consequences.
    10. You’ll most likely be on your own when negotiating with the bank, because the bank will rarely compensate an attorney or real estate agent for assisting you as they would in a short sale.

    A deed in lieu of foreclosure is most beneficial for the lender in states where the foreclosure process is very long (usually in judicial foreclosure states where the lender is required to file a lawsuit against the borrower in order to foreclose). When foreclosure is a very long and expensive process for the lender, they would benefit by getting the property back several months earlier than they would have by foreclosing, and most likely in better condition (especially if the house is vacant). This would typically save them thousands of dollars in legal and administrative fees, and allow them to sell the property as a bank-owned property to get it off their books sooner.

    Washington State is a non-judicial foreclosure state, and the foreclosure process only takes a few months.  The foreclosure auction, or trustee sale, can be scheduled for roughly six months after the date of default, so the lender doesn’t have as much to gain from a deed in lieu of foreclosure. Also, lenders typically lose more money by taking a house back and selling it as a bank-owned property than they would from a short sale, which is one reason why they will usually require that you attempt a short sale first.

    In some cases, the deed in lieu of foreclosure is a viable option. However, by knowing all of your options, you'll be able to make an informed decision and know whether this option is best for you.

  • Can the "Produce the Note" Strategy Really Stop Foreclosure?

    It's the Internet age, and more and more homeowners are searching the Internet to find out how they can save their home if they’re in foreclosure. One strategy I’ve been asked about several times is the “Produce the Note” strategy. Some articles have been written that have led many homeowners to believe that this strategy is the “silver bullet” to delay or stop foreclosure, or even get your mortgage wiped out completely so you own your house free and clear.

    The “Produce the Note” strategy requires the lender to prove it has the actual authority to foreclose, by requiring it to produce the original promissory note. The goal is to make certain that the foreclosing lender is, in fact, the owner of the note. There is only one original promissory note for your mortgage that has your signature on it. This is the document that proves that you owe the debt.

    During the lending boom, many mortgages were sold off to other lenders or servicer or sliced up and sold to investors as securitized packages on Wall Street. In the frenzy of turning these over as fast as possible to make the most money, many of the new lenders did not get the proper paperwork to show they own the note and mortgage. This is the key to the strategy—Lenders are foreclosing on homeowners, but don’t have the proper paperwork to prove they have a right to foreclose.

    Sounds pretty simple--If they can’t produce the original promissory note, then you don’t really owe the debt, right? In Washington State (and other non-judicial foreclosure states), that’s not necessarily the case.

    Judicial Foreclosure vs. Non-Judicial Foreclosure

    In a judicial foreclosure state, the bank must sue the borrower and go to court in order to foreclose. The “Produce the Note” request is done as part of the lawsuit. Washington is a non-judicial foreclosure state, meaning that the lender doesn’t have to take you to court in order to foreclose. You can request that the bank produce the original note, but they’re likely to disregard the request completely, leaving you with only one other option--File a lawsuit against the lender and request that they produce the original note. This could become very time consuming if you try to do it yourself, or expensive if you use an attorney. I don’t recommend filing a lawsuit without the help of an attorney. Also, this strategy is more effective when your loan has been sold off on the secondary market. If it hasn’t, then your lender most likely has the original note and can easily produce it.

    My Own Experience With Lost Promissory Notes

    I have been in situations with my own properties where original promissory note was lost. I've worked with notes from private lenders and seller carry-back notes, and these non-institutional lenders sometimes lose the original note. The seller carrying back a note may scan the original note and Deed of Trust into their computer then discard the originals, not realizing that they were supposed to keep them. When the note is being paid off and the lender cannot produce the original note or Deed of Trust, the escrow company just has them sign and notarize an "Indemnification of Lost Deed of Trust and Original Note". Then everything is fine.
  • The Bank Locked Me Out Of My House! Should I Call The Police?

    You’re a few house payments behind, and one day you find that the front door lock and deadbolt have been drilled out and replaced with new ones and the garage door opener has been disconnected. Now you can’t even get into your own house! Who is responsible for this? This must be illegal, right?  After all, you still own the house.

    Before you call the police (who will explain to you that they can’t do anything about it), you’ll need to understand that your lender isn’t trying to deny you access to your house. Here’s an explanation of what happened and why:

    The Deed of Trust (part of the mortgage documents from the lender) that you signed at closing or when refinancing has a paragraph that states something like, “If the Borrower fails to perform the covenants and agreements contained in this Security Instrument…” (i.e. making the payments), “…or Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property… including securing and/or repairing the Property… including but not limited to… entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, …” You remember reading that, right? (Let’s be honest now…)

    So the Deed of Trust, which identifies the property as collateral for the loan, allows the lender to change the locks. The lender typically contracts out to a national field service company which contracts out to a local independent contractor to change out the locks. Some field service companies have a policy to contact the real estate agent if there’s a sign in the yard and offer them a new key for the key box, and other companies have a policy not to contact the agent (which is a bad business practice in my opinion). The problem is that if the field service person calls the agent, it’s after the lock has been changed and damage done to the door and/or frame. Also, the field service person will often times keep the old hardware (which is usually nicer than what they replaced it with). I had a situation recently where the field service person removed a $150 lock set from the door, replaced it with a $20 doorknob, and refused to return the old lock set to the owner.

    What happens when they change the locks and don’t contact you or your real estate agent? Usually, calling your lender will get you the information needed to gain possession of the new key. However, some people just drill out the new lock and install a different one. This generally doesn’t take a locksmith—The doorknob can be easily removed once the door is open and replaced with another cheap model from a local hardware store. The next time the field service person goes out to check on the property and their key doesn’t work, they’ll typically call the agent’s phone number on the yard sign. If that happens, just remember that they were just following orders from the field service company and they often times may not agree with all of the company’s policies. They’re usually willing to work with you if you treat them with respect. Also, keep in mind that the local field service person may have to cover the cost of a new doorknob out of their own pocket if you drill out their lock. This may make it more difficult to get your old doorknob and lock set back from them if it has some value.

    The lender will take measures to secure the house if they believe it has been abandoned. They need to protect the asset that is securing the loan. If you mention to your lender that you moved or if your house looks like it could be vacant, the lender will generally take measures to secure the house. To assure that this doesn’t happen to you while you’re still living there, here are some things to consider:

    • Make sure the lawn gets mowed occasionally,
    • Pick up flyers and newspapers from the porch and driveway,
    • Park your car in the driveway instead of the garage, 
    • Think of anything else that could make the house appear to be occupied.

    If you have already moved, locking the doorknob lock and leaving the deadbolt unlocked could prevent the risk of damage from drilling out the deadbolt. However, you may not want to do this if you still have valuables in the house or you’re in an area where the burglary risk is high. A damaged door could be a turn-off to some buyers if the house is otherwise in good condition, as it’s one of the first things they see.

    The bottom line is that there’s very little you can do to prevent the lender from changing the locks if your house is vacant and you’ve fallen behind on your mortgage payments. However, knowing the process and how to deal with it may help reduce stress levels if it happens to you.

  • Lynnwood Home For Sale in Settler's Meadow Near Lake Stickney


    • 2,554 sq. ft., 3 bath, 4 bdrm 2 story - MLS® $329,900

     -  Immaculate home on a quiet dead end street with over 2500 SF of living space. Features include a large kitchen with granite countertops and walk-in pantry, hardwood floors and 9-foot ceilings on main floor, 2-car garage with extra storage, and a fully fenced back yard that backs to a wooded area. Many upgrades including high-tech wiring w/cable, satellite, phone & network jacks, and ceiling surround sound w/individual room controls. Pool table stays! Close to freeways, bus lines, and amenities.

    Property information

  • Is Your Real Estate Agent Breaking The Law?

    Has a real estate agent offered to negotiate a loan modification or a short sale for you, or are you a real estate agent that has offered these services to your client? The purpose of a loan modification is to get the bank to modify the mortgage terms to reduce the interest rate and/or monthly payments on an existing mortgage. On a successful short sale, the bank agrees to take a payoff that is less than what is owed.

    As a real estate agent in Washington State, I specialize in short sales. I’m not an attorney and I can’t give legal advice, so if you have any legal questions about the information provided here, I recommend that you seek independent legal counsel.

    If a real estate agent or another third party negotiates a loan modification or short sale, they may be practicing law without a license according to Washington State law. The Washington State Supreme Court adopted General Rule (GR) 24 in 2001, defining the practice of law, which includes negotiation of legal rights or responsibilities on behalf of another entity or person(s). Anyone negotiating with the borrower’s lender on their behalf is negotiating the legal rights and responsibilities on the borrower’s original loan agreement with the bank, which would fall under the Supreme Court definition of the practice of law.

    Some real estate agents use a third-party short sale service to negotiate short sales on behalf of their clients. Under the same rules, the third-party short sale service would need to use negotiators that are licensed to practice law (i.e. attorneys). Most don't.

    I know there may be some real estate agents that are furious as they’re reading this, thinking that this cannot be true they’ve been negotiating their own short sales for months or years and they’ve never heard of this. However, just because you aren’t aware of it doesn’t mean it doesn’t exist and that it cannot affect you. Also, if you’re not in Washington State, you may not be off the hook. Other states most likely have similar laws, so I would encourage you to check your own state laws.

    Attorneys are currently using the Washington State Supreme Court General Rule 24 mentioned above as a primary argument against real estate agents and investors in lawsuits when a short sale client is unhappy with the results of a short sale. In one case I’m aware of, an agent outsourced short sale negotiations to a third-party short sale service that wasn’t attorney-driven. The short sale was approved, but after the transaction was complete, the seller claimed that they weren’t aware that they were still liable for the deficiency-- the difference between what the bank was owed and what they received from the short sale. (Short sale negotiators will usually request that the bank forgive any deficiency.) The seller sued the real estate brokerage and named the third-party negotiation service in the lawsuit. The settlement ended up being paid by the broker’s errors and omissions insurance. This is an example of a case where there may have been failure to properly disclose all material facts, but you could potentially be a target of a lawsuit even if you did everything correctly but weren’t able to produce the desired results for the seller. The seller’s attorney playing the “unauthorized practice of law” card could kill your case regardless of whether there was any wrongdoing on your part.

    Now I’ll also mention that there’s an unwritten assumption that real estate agents are allowed to negotiate a short sale as part of the real estate transaction. However, real estate agents are licensed to perform limited real estate law which involves filling in the blanks on pre-written real estate forms and contracts. I have not found anything in our laws stating that a real estate agent can negotiate a borrower’s legal rights and responsibilities with their bank, even as a part of the real estate sale transaction. The Promissory Note and Deed of Trust are legal contracts between the borrower and the bank.

    I use an experienced attorney to negotiate all of my short sales. I wouldn’t consider doing it any other way. Also, using an attorney with significant short sale experience is imperative. A good attorney will have proven negotiation strategies that may only be available to an attorney. They’ll also be familiar with the different loan products and the loss mitigation rules associated with those loan products (which even the banks’ loss mitigators are often not aware of). An inexperienced attorney will typically have a much lower short sale approval rate.

    I know there are a lot of real estate agents negotiating their own short sales, and in my opinion, this carries less risk than outsourcing to a short sale negotiation service that’s not attorney-driven. It’s not my place to tell other agents what they can and can’t do. However, I think it’s important for agents to understand their risks, and to make their own decisions based on the level of risk they feel comfortable with. I tend to have a low risk tolerance, so my business model reflects that.

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